IT sector earnings preview: Cross-currency impact to pull down revenue growth

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Updated: Oct 12, 2015 12:58 AM

Revenue growth convergence between TCS and Infosys to become apparent

Key Takeaways

Revenue growth would remain tepid in y-o-y (year on year) terms (our focus), showing further deceleration but q-o-q (quarter on quarter) growth (street’s focus) would be healthy due to seasonality. Cross- currency impact would pull down revenue growth and partially offset margin gains from INR depreciation. Revenue growth convergence between TCS and Infosys would also be apparent, with the two also leading on q-o-q growth. We expect quarter results to determine stock leadership for the next quarter.

Sept-15 preview: Growth lacklustre, cross-currency offsets some INR gains

While sequential USD revenue growth is likely to remain healthy in the seasonally strong quarter, on y-o-y terms growth is likely to remain lacklustre and fail to indicate a pick-up in overall demand. The growth convergence between TCS and Infosys would be apparent, with the two companies also leading on sequential growth. Currency would again play spoilsport, with the movement in certain currencies like AUD (Australian Dollar) and LATAM (Latin America) currencies partially offsetting some gains due to the depreciation of the INR. Cross-currency was a small positive in the previous quarter. Pressure on margins due to pricing and competitive intensity would again be evident, with the companies failing to pass on the full impact of INR depreciation in the P&L.

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Currencies – cross-currency again a headwind

Companies had faced a significant headwind from cross-currency moves in the March-15 quarter. Although not as significant, the cross-currency factor would yet again come into play after a quarter of respite. Across our coverage, we expect a negative 60-100 bps impact on reported USD revenue growth. This should offset some gains from the 2.5% q-o-q (quarter on quarter), 7.3% y-o-y (year on year) depreciation of the INR versus USD on a realised rate basis.

TCS—leading on growth. We estimate a q-o-q growth of +3.5% (+6.3% y-o-y, +4.3%in cc, terms). Given the expectations and traditional seasonality of a weaker 2H, growth below 4% in cc terms would be a significant negative. Margins would likely expand 90 bps on account of no visa costs, no wage increases and INR depreciation.

Commentary on demand environment, pricing trends, attrition and update on Japan business and Diligenta would be critical.

Infosys—catching up. We expect growth of +3.5% q-o-q (+6.1% y-o-y, +4.2% in cc terms) and closing of growth gap versus TCS. Margins should expand 80bps q-o-q. Pricing pressure as indicated by company management and Infosys itself being aggressive on pricing has been a focus and margin guidance on the account would be keenly watched.

Wipro—energy woes. USD revenues should likely grow +2.2% q-o-q (+3.5% y-o-y, +3% in cc), in line with its guidance of +1.5% to +3.5% q-o-q growth for the Sept-15 quarter. Energy vertical will likely remain a drag on growth. Margins will likely decline 50bps q-o-q, on account of the two-month incremental impact of the wage hike and cross-currency flowthrough partially offset by the INR depreciation. We expect Wipro to guide to a 2-4% q-o-q growth in the Dec-15 quarter.

HCL Tech—pre quarter warning–In line with the pre-quarter briefing note, we expect HCL Tech to report USD revenue growth of +0.5% q-o-q (+7.8% y-o-y), cross-currency to have an impact of -80bps as indicated and client-specific issues an impact of -130bps. Margins are likely to come under pressure due to wage hike (negative 80-90bps), flow-through of cross currency and client-specific issues and cost associated with delay in the IMS engagement, partially offset by INR weakness. We forecast an 80bps q-o-q decline in margins.

Tech M—some recovery in sight. We expect the company to post 2% q-o-q increase in USD revenue (+12% y-o-y, +3% in cc basis) with growth across the telecom and enterprise segments. An improvement in utilisations due to cost and manpower rationalisation, absence of visa costs, improving margins in LCC and INR depreciation should help margins expand 200bps q-o-q. Commentary on growth of telecom business and on margin trajectory overall for FY16 would be critical, given these have been the reasons for recent disappointments.

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